MANAGEMENT OF THE CONSOLIDATED FINANCIALS UNDER INDIAN GAAP
Industry Structure and Developments
Global Markets Overview
According to the Forecast Alert: IT Spending, Worldwide, 2008-2015, 4Q11 Update reportby Gartner Inc., an IT research and advisory company, the headline is that the global ITspending growth forecast has been revised downward, from 4.6% to 3.7% in 2012. Globaleconomic slowdown and the impact of Eurozone crisis have combined to lower the outlook forthe U.S. dollar-denominated growth.
The main reasons for the downward revision are as follows:
• The Rurozone crisis has caused market volatility and personal and corporateuncertainty. The short-term outlook for spending on IT products and services byenterprises and consumers has reduced due to the crisis in the Eurozone, affecting majortechnology sectors such as enterprise software services, IT services andtelecommunications services, all of which are expected to see lower growth rates.
• Global economic growth will slow down in 2012 to a real GDP growth rate of lessthan 2% in the U.S. and a mild recession in Europe. U.S. dollar based IT spending inWestern Europe has been forecasted to contract in 2012 due to political uncertainty whichwill lead to more cautious spending on IT products and services.
• The 2012 growth outlook across all technology sectors have been reviseddownwards. There has been significant revision in the growth outlook for computinghardware, IT services and telecommunication equipment and services sectors with a decreaseof 3.4%, 1.3% and 1.3% in spending in those sectors, respectively, compared to theprevious quarter’s update.
• The reductions in the computing hardware forecast for 2012 reflect concerns forU.S. and Western European market growth, due to weak 4Q11 results, and a highly uncertaineconomic outlook for both markets. The reductions also reflect the impact of HDD("Hard Disk Drive"), supply constraints on HDD and PC shipments in the firsthalf of the year. The reduction in the Western European forecast also reflects moreaggressive assumptions about the ability of political leadership to adopt effective shortterm measures to support debt laden countries and reformation of long term structuralloans. The supply of hard drives is expected to be reduced by as much as 25% during 2012due to the impact of floods in Thailand, which is a major hub for hard-drivemanufacturing, both for finished goods and components.
• Through 2015, the forecast for long term annual average growth in global ITspending has been reduced to 5.0% compared with a 5.4% growth level estimated in theprevious quarter.
(Disclaimer: The Gartner Report described herein, Forecast Alert: IT Spending,Worldwide, 2008-2015, 4Q11 Update (ID Number: G00226278 represent) data, research opinionor viewpoints published, as part of a syndicated subscription service, by Gartner, and arenot representations of fact. Each Gartner Report speaks as of its original publicationdate (and not as of the date of this Prospectus) and the opinions expressed in the GartnerReport(s) are subject to change without notice.)
Indian IT Industry Outlook
According to Gartner Inc. (Source: Gartner’s Press Release dated 24th Jan, 2012),an IT research and advisory company, Indian Industry IT spending is forecasted to exceed$39 billion in 2012, an increase of 10.3% from 2011 spending of $36 billion. The growth ofIT in India is expected to increase, with an annual increase to exceed this level through2015.
The increase in demand for IT products and services to support the rapid growth ofindustries has led to the emergence of IT as an enabler in industries beyondmanufacturing, government and financial services. The retail industry is expected toachieve the strongest growth in 2012 where IT spending is forecast to grow 11.8%. Recentdecisions to allow 100% foreign direct investment (FDI) in single brand retail, and up to51% in multi brand retail, are expected to provide the sector with significant boost interms of IT usage and adoption.
The banking and securities sector is expected to reach $11.6 billion in 2015 from $5.2billion in 2011, a CAGR of 11.6% . Retail is expected to see a growth from $1.7 billion in2011 to $2.7 billion in 2015, a CAGR of 12.8%.
NASSCOM Strategic Review 2011 states that Information Technology’s evolution,advancements and results have continued to spread at a rapid pace. Despite globaluncertainties, natural disasters and low consumer confidence in 2011, global spending ontechnology and demand for global sourcing for IT-BPO services remained significant. IndianIT-BPO sector has retained its position as the world’s leading global sourcingdestination for IT-BPO services with a share of 58% in 2011. India is one of the mostcost–competitive providers of IT-BPO services. Service providers are effectivelyutilizing India’s talent pool by designing large scale talent re-engineeringinitiatives and employee engagement activities. This is enabling the industry to provideboth end-to-end and high-end value-added services across various sectors. IT-BPO serviceswill be instrumental in the economic and social rise of India in the future. As a result,the domestic IT-BPO market is expected to grow in parallel with the growth of the Indianeconomy. The domestic IT-BPO (excluding hardware) spending trend will continue in 2013 asthe industry is expected to grow at 13-16%. IT-BPO exports is expected to grow 11-14% in2013, driven by proliferation of as-a-service model around enterprise mobility, cloud andplatform solutions, analytics offerings and social media.
Software products, IT & BPO sector has approximately spent $1.3 trillion or 63% ofthe total spending in 2011, with IT hardware accounting for approximately $645 billion or37% of the total spending in 2011. There was a renewed demand for overall global sourcing,which grew by 12% as compared to 2010 representing twice the global technology growth.
IT software and services sector’s revenue (excluding hardware) is estimated at $88billion for the year 2012. During this period, direct employment is expected to reachnearly 2.8 million, an addition of 230,000 employees, while indirect job creation isestimated at 8.9 million. As a proportion of national GDP, the sector revenues have grownfrom 1.2 % in 1998 to an estimated 7.5% in 2012. The total share of total Indian exports(merchandise plus services) increased from less than 4.0% in FY1998 to 25.0% in 2012.
Export revenues (excluding hardware) are estimated to reach $69 billion in 2012accounting for a 2.2 million workforce. This represents a growth of 16.3%; these exportsalso account for over 68.5% share in aggregate IT-BPO revenue. Within exports, IT servicessegment is the fastest growing at 19% over 2011 with export revenue of $40 billion,accounting for 58 % of total exports. The BPO segment is expected to grow by 12% cent toreach $ 16 billion in 2012. The software products segments are expected to generateexports of $13 billion, a growth of nearly 14% over 2011.
Domestic IT-BPO revenue (excluding hardware) is expected to grow at almost 17% to reach$918 billion in 2012. Strong economic growth, rapid advancement in technology,infrastructure, increasingly competitive Indian organizations, enhanced focus by thegovernment and emergence of business models that help provide IT to new customer segmentsare key drivers for increased technology adoption in India. IT services is the fastestgrowing segment in the Indian domestic market, growing by 18% to reach $589 billion,driven by increasing adoption from all customer segments – government, enterprise,and consumers. Domestic BPO segment is expected to grow by 17% in 2012, to reach $149billion, driven by demand from voice-based (local language) services and increasingadoption by both traditional and emerging verticals, including the government. Thedomestic software products segment is set to grow to $180 billion in 2012, a growth of 13%over 2011.
Opportunities and Threats
Global Delivery Model
Global demand for high quality, lower cost IT and IT-enabled services has created asignificant opportunity for us, which we use to successfully leverage the benefits of, andaddress the challenges in using, an offshore talent pool. Our effective use of offshorepersonnel offers a variety of benefits, including lower costs, faster delivery of new ITsolutions and innovations in vertical solutions, processes and technologies.
We have adopted a global delivery model for providing services to our clients. Ourglobal delivery model includes on-site and offshore teams. We have offshore developmentcenters located in Bangalore, Hyderabad, Chennai, Noida, Mumbai, Pune and Gandhinagar inIndia and have global development centers located in Australia, Mexico, Canada, the UnitedStates, China, Singapore and India. The centers can deliver both onsite and offshoreservices, depending on client location and preferences.
IT services that we deliver using our offshore centers include software applicationdevelopment and maintenance, implementation and support of enterprise applications,package evaluation and implementation, re-engineering, data warehousing, businessintelligence, analytics, data management and integration, software testing and ITinfrastructure management services. We believe that we deliver high quality solutions toour clients at substantial savings by using our global pool of highly talented people.
IT-enabled operations offshore outsourcing solutions and services that we offer includeBPO, transaction processing services and call center services. BPO services are offered toclients that are looking to achieve converged IT and BPO solutions. The transactionprocessing services offered are focused on the mortgage banking, financial services,insurance and capital market industries, except for the delivery of finance and accountingfunctions such as accounts payable which can be performed for clients across allindustries. Our call center services are offered to clients in several industries and arenot industry specific.
Our Competitive Strengths
We believe our competitive strengths enable us to deliver high-quality, efficient andscalable services. These strengths include:
Focused Industry Expertise
We concentrate on industries where we believe we can generate sustained revenue growth,such as insurance, manufacturing, retail and distribution, financial services andcommunications, media and utilities. Through our extensive experience in these industries,we provide solutions that respond to technological challenges faced by our clients. Wealso focus on technology practices, specifically in product engineering services.
Successful Client Relationships
We have demonstrated the ability to build and manage our client relationships. Ourlong-term relationships typically develop from performing discrete projects to providingmultiple service offerings spread across a client’s businesses. Through our flexibleapproach, we believe we offer services that respond to our clients’ needs regardlessof their size. By leveraging our industry experience with our project managementcapabilities and breadth of technical expertise, we solidify and expand our clientrelationships.
Extensive Suite of IT Services
We provide a comprehensive range of IT services, including application development,application maintenance and support, packaged software implementation, infrastructuremanagement services, product engineering, business process outsourcing and qualityassurance services. Our knowledge and experience span multiple computing platforms andtechnologies, which enable us to address a range of business needs and to function as avirtual extension of our clients’ IT departments. We offer a broad spectrum ofservices in select industry sectors, which we leverage to capitalize on opportunitiesthroughout our clients’ organizations.
Delivery and Operational Excellence
Through our mature global delivery model, we deliver high quality and cost-effective ITservices from multiple locations in a reduced timeframe. We vary the composition of ouremployee resource pool, in terms of seniority and location, to maximize our productivityand efficiency. Our processes and methodologies have achieved Capability Maturity ModelIntegrated (CMMi) Level 5, the highest attainable certification. We use project managementtools to deliver services to client specifications in a timely and reliable manner whilemaintaining a high level of client satisfaction.
Highly-skilled Professionals
We have a highly qualified management team with a broad range of experience in theglobal IT industry. Our managers and senior technical personnel provide in-depth projectmanagement expertise to customers. To maintain this level of expertise, we have placedsignificant emphasis on recruiting and training our workforce of highly skilledprofessionals.
Our Strategy
Our Vision: Our vision is "Changing the rules to deliver high-impact outcomes fora new technology-enabled world". The combination of iGATE and Patni is a fullyintegrated technology and operations ("iTOPS") enterprise with a global servicesmodel. We enable clients to optimize their business through a combination of processinvestment strategies, technology leverage and business process outsourcing andprovisioning. We have leveraged our deep understanding of diverse business challengesfaced by global enterprises, coupled with our thought leadership in IT, andprocess/operations excellence in building the iTOPS model. We characterize a clear valueproposition around our Global Delivery Model (GDM) offering to deliver varied and complexIT-enabled services for client’s global customers across multiple locations. The goalis to bring about business transformation for customers on a pioneering ‘pay foroutcomes, not effort’ premise. With a global presence and world-class deliverycenters spanning the Americas, Europe- Middle East-Africa (EMEA) and Asia-Pacific, theiGATE Patni GDM meshes a well-defined, single business management system with industrybest practices, models and standards such as ISO, CMMI, ITIL and Six Sigma. Robustknowledge and responsibility transition across employees is seamless ensuringclockwork-like efficiency and effectiveness of provided services.
Penetrate and Grow Strategic Client Accounts
We have achieved strong revenue growth by focusing on select, long-term customerrelationships which we call strategic accounts. We aim to expand the scope of our clientrelationships by leveraging our focused industry sector expertise with deliveryexcellence, responsive engagement models and breadth of services. We intend to focus onadding new strategic clients and further penetrate our existing customer relationships. Weaddress the needs of our larger strategic relationships through dedicated account managerswho have responsibility for increasing the size and scope of our service offerings to suchclients. We aim to strengthen our sales and marketing teams, a majority of which arealigned to focus on specific industries.
Strengthen and Broaden our Industry Expertise with Micro Vertical Focus
We intend to strengthen our understanding of key industries by investing in building oracquiring intellectual property like platforms, tools, etc in chosen micro verticalswithin each industry segment that we operate. We shall also continue to invest in a strongbase of industry experts, business analysts and solutions architects as well asconsidering select from targeted acquisitions. We believe we can create competitivedifferentiation and add more value than a general service provider through suchinvestments by enhancing our understanding in specific industry and domain requirements ofour clients.
Strengthen and Broaden our Service Lines
We aim to deepen our existing client relationships through new and more comprehensiveservice lines. In recent years we have added new capabilities in line with our growth andcustomer needs. We continually explore new initiatives through our internal centers ofexcellence, which focus on innovation in specific technology platforms or services. Forexample, we added quality assurance services as a new service line, and developedincreased capabilities such as business intelligence, database administration and legacysystem modernization in other service lines.
Optimize and Expand Delivery Capability
Our process and methodologies such as PatniPLUS consolidate decades of softwaredevelopment and maintenance experience in delivering and supporting enterpriseapplications and products for our clients. We believe that our mature process frameworkseffectively reduce risk and unpredictability across the software development life cycleand flexibly integrate with our clients’ processes. We further believe that ourquality systems create strong predictive and diagnostic focus, delivering measurableperformance to clients’ "critical to quality" parameters resulting in afaster turnaround, higher productivity, and on-time to first-time-right deliveries. Weprovide full visibility on our projects for our clients through integrated web-basedproject management and monitoring tools.
We are committed to enhancing the processes and methodologies that improve ourefficiency. We aim to develop new productivity tools, refine our software engineeringtechniques and maximize reuse of our processes. To maximize improvements in our processesand methodologies we have expanded our infrastructure and we have constructed newknowledge park campuses in India to provide world-class infrastructure, high standards ofquality and secure delivery.
Competition
The IT and IT-enabled operations offshore outsourcing services industries are highlycompetitive, and are served by numerous global, national, regional and local firms. Ourprimary competitors in the IT and IT-enabled outsourcing industry include IT outsourcingfirms, consulting firms, systems integration-firms and general management consulting firmssuch as Tata Consultancy Services Limited, Infosys Technologies Limited, CognizantTechnology Solutions Corporation, Wipro Limited, Genpact Limited, WNS (Holdings) Limited,EXL Service Holdings Inc., Syntel Inc., Mindtree Limited, and Hexaware TechnologiesLimited.
We believe that the principal competitive factors in the IT and IT-enabled operationsoffshore outsourcing markets include the range of services offered, size and scale ofservice provider, global reach, technical expertise, responsiveness to client needs, speedin delivery of IT solutions, quality of service and perceived value. Many companies alsochoose to perform some or all of their back office IT and IT-enabled operationsinternally.
Segment-wise Performance
Patni’s geographic segmentation is based on location of customers and comprisesUnited States of America ("USA"), Europe, Japan, India and Others. Revenue inrelation to geographic segments is categorised based on the location of the specificcustomer entity for which services are performed irrespective of the customer entity thatis billed for the services and whether the services are delivered onsite or offshore. Weexpect that a substantial majority of our revenues will continue to be derived fromclients located in the United States.
Geographic Segments
| Country | Year ended 31 December |
| 2009 | 2010 | 2011 |
| USA | 79.0% | 79.9% | 77.6% |
| Europe | 12.7% | 11.4% | 13.7% |
| Japan | 3.5% | 3.1% | 3.3% |
| India | 1.0% | 2.2% | 2.2% |
| Others | 3.8% | 3.4% | 3.2% |
| Total | 100.0% | 100.0% | 100.0% |
Outlook, Risks and Concerns
These have been discussed in detail in the Risk management section in this AnnualReport.
Internal Control Systems
We maintain internal control systems designed to provide reasonable assurance thatassets are safeguarded, transactions are executed in accordance with management’sauthorization and properly recorded, and accounting records are adequate for preparationof financial statements and other financial information. The internal audit functionperforms internal audit periodically to ascertain their adequacy and effectiveness.
The Audit Committee which is a sub-committee to Board of Directors consists solely ofindependent directors. The Audit Committee monitors and provides effective supervision ofour financial reporting process with a view towards ensuring accurate, timely and properdisclosures coupled with transparency, integrity and quality of financial reporting. OurAudit Committee oversees the work carried out in the financial reporting process by ourmanagement, including the internal auditors and reviews the processes and safeguardsemployed by each. In addition our Audit Committee has the responsibility of oversight andsupervision over our system of internal controls over financial reporting, audit process,and process for monitoring the compliance with related laws and regulations. The committeealso holds discussions with Statutory Auditors, Internal Auditors and the Management onmatters pertaining to internal controls, auditing and financial reporting. The Committeereviews with the statutory auditors the scope and results of the audit.
In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002and the related regulations regarding our required assessment of our internal controlsover financial reporting and our external auditors’ audit of that assessment requiresthe commitment of significant financial and managerial resources. We consistently assessthe adequacy of our internal controls over financial reporting, remediate any controldeficiencies that may be identified, and validate through testing that our controls arefunctioning as documented.
Financial Condition
| | (Rs. in thousands except share data) |
| 31 December 2011 | 31 December 2010 |
| Share capital | | |
| Balance at the beginning of the year | 262,838 | 258,252 |
| Shares issued during the year: | | |
| - ESOP plan | 6,150 | 4,586 |
| Balance at the close of the year | 268,988 | 262,838 |
The Company has established the ‘Patni ESOP 2003 – Revised 2009’ Plan,under which it issued 3,075,053 shares to 1,411employees and 13 directors during the year.The Company is authorized to issue up to 19,142,085 equity shares to eligible employeesunder the said ESOP plan. In June 2009, at the Annual General Meeting the shareholders hadauthorized the Company to issue additional 8,000,000 equity shares to eligible employeesunder the "Patni ESOP 2003 - Revised 2009"plan.
Following these issuances of the Company’s equity shares during the year, theissued, subscribed and paid-up share capital increased by 3,075,053 shares.
Reserves and surplus
The Company transferred an amount of Rs. Nil million from its profit for the year tothe general reserve, while Rs. 4,014.6 million was retained in the profit and lossaccount.
Secured loans
The Company acquires vehicles under finance lease for a non-cancellable period of fouryears. The lease rental obligation in relation to such vehicles is recorded under securedloans. As per the lease agreement, the ownership of these vehicles would not transfer tothe Company.
Net deferred tax liability
The Company recorded cumulative net deferred tax liability of Rs. 118.1 million as of31 December 2011. The deferred tax liability represents U.S. branch profit taxes for Rs.147.1 million & others Rs. (29) million.
Goodwill
The excess of cost to the parent company of its investment in subsidiaries over theparent company’s portion of equity in the subsidiaries, at the respective dates onwhich investments in subsidiaries were made, is recognized in the consolidated financialstatements as goodwill. Goodwill recorded in the consolidated financial statements has notbeen amortized, but evaluated for impairment.
The aggregate goodwill recorded in the financial statements comprises the following:
| | (Rs. in thousands) |
| 31 December 2011 | 31 December 2010 |
| Balance at the | 4,838,060 | 4,765,305 |
| beginning of the year Acquisition during the year | - | 229,237 |
| Effect of foreign currency translation | 667,368 | (156,482) |
| Balance at the end of the year | 5,505,428 | 4,838,060 |
| Fixed assets (Tangible) | | | (Rs. in thousands) |
| Year ended 31 December 2011 | Year ended 31 December 2010 | Increase / (Decrease) % |
| Gross block | | | |
| Land - freehold | 171 | 171 | 0.0% |
| - leasehold | 942,940 | 844,528 | 11.7% |
| Buildings | 3,775,092 | 3,657,678 | 3.2% |
| Leasehold improvements | 470,003 | 412,990 | 13.8% |
| Computers and other service equipment | 2,761,759 | 2,439,744 | 13.2% |
| Electrical installations | 901,387 | 888,856 | 1.4% |
| Office equipments | 1,063,415 | 1,019,185 | 4.3% |
| Furniture and fixtures | 1,198,709 | 1,134,489 | 5.7% |
| Vehicles | 26,825 | 53,876 | -50.2% |
| Total | 11,140,301 | 10,451,517 | 6.6% |
| Less: Accumulated depreciation | 5,836,369 | 4,811,185 | 21.3% |
| Add: Capital work-in-progress | 789,319 | 921,512 | -14.3% |
| Net fixed assets | 6,093,251 | 6,561,844 | -7.1% |
| Fixed assets (Intangible) | | | (Rs. in thousands) |
| Year ended 31 December 2011 | Year ended 31 December 2010 | Increase / (Decrease) % |
| Goodwill | 5,505,428 | 4,838,060 | 13.8% |
| Computer software | 2,463,520 | 2,268,874 | 8.6% |
| Intellectual property rights | 1,787,690 | 1,508,468 | 18.5% |
| Customer contracts and non contractual customer relationships | 82,778 | 69,935 | 18.4% |
| Less: Accumulated depreciation | 3,718,501 | 2,191,715 | 69.7% |
| Net fixed assets | 6,120,915 | 6,493,622 | -5.7% |
During 2011, the net increase in the gross block of fixed assets amounts to Rs. 688.78million. This is mainly represented by Rs. 81.8 million on capitalization of land &additional charges paid to SIPCOT authorities towards leasehold land, Rs. 17.1 millionpaid to additional premium on Hinjewadi land for extension of time limit, Rs. 117.4million on capitalization of flats at Glenridge, Powai, Rs. 229.3 million due to purchaseof computer and equipments, Rs. 15.3 million due to capitalization of Pune SEZ Rs. 20.6million capitalization of office equipments of Pune SEZ and Rs. 197.5 million due torevaluation of fixed assets of subsidiaries.
The net decrease of Rs. 132.2 million under CWIP and capital due to capitalization offlats at Glenridge, Powai.
During 2011, the Company added Rs. 1,154.1 million to its Intangible assets. This isrepresented by Rs. 136.9 million due to purchase/capitalization of software’s, Rs.1,001.1 million due to revaluation of goodwill, Intellectual property rights and Customercontracts and non contractual customer relationships of USA and UK.
Investments
Surplus cash generated from operations are invested in long-term and current moneymarket instruments. Investments increased to Rs. 16,880.4 million as of 31 December 2011compared to Rs. 12,614.9 million as of 31 December 2010. Increase is due to purchase ofvarious mutual funds.
Deferred tax asset (net)
The Company recorded cumulative deferred tax asset (net) of Rs. 1,135.4 million as of31 December 2011. This relates to the subsidiary companies, Patni Americas Inc. USA, PatniComputer Systems (GmbH), Patni Telecom Solutions Private Limited (India), Patni TelecomSolutions Inc (USA) and Patni Life Sciences Inc. The deferred tax asset represents timingdifferences arising out of provisions for retirement benefits, provision for bad anddoubtful debts, deferred revenues , unbilled revenue, accrued expenses and carry forwardlosses, unrealized loss on derivatives, employee stock compensation costs, depreciations,amortization of intangible assets.
Sundry debtors
Sundry debtors of Rs. 7,314.1 million (net of provision for doubtful debts amounting toRs. 177.9 million) represents 20.5 per cent of revenues for the year ended 31 December2011. During the year, the debts outstanding for a period exceeding six months increasedto 4.6 per cent of gross debtors as compared to 3.9 per cent in the previous year.Provision for doubtful debts as a percentage of sundry debtors decreased to 2.4 per centfrom 2.9 per cent in the previous year. The age profile of debtors is given below:
| Period in days | Year ended 31 December 2011 | Year ended 31 December 2010 |
| 0-180 | 95.4% | 96.1% |
| More than 180 | 4.6% | 3.9% |
| Total | 100.0% | 100.0% |
Cash and bank balances
The Company has cash and bank balances of Rs. 2,259.8 million and Rs. 3,533.7 millionas at 31 December 2011 and 2010, respectively. Bank balances include balances maintainedboth in India and overseas. Bank balances in India include both rupee accounts and foreigncurrency accounts.
As at 31 December 2011 and 2010, the Company had cash and cash equivalents (cash andbank balances including short term investments) of Rs. 19,140.2 million and Rs. 16,010.6million, respectively. Cash and cash equivalents represent 41.9 per cent and 39.6 per centof total assets as at 31 December 2011 and 2010, respectively.
Unbilled revenue
Unbilled revenue represent revenues recognized by the Company in excess of amountsbilled. These amounts are billed after the milestones specified in the agreement areachieved and once customer acceptance is received. Unbilled revenue increased to Rs.1,735.5 million during the year ended 31 December 2011 compared to Rs. 1,388.9 million inthe year ended 31 December 2010.
Loans and advances
During the year ended 31 December 2011 advances recoverable in cash or kind increasedto Rs. 373.7 million from Rs. 317.1 million as at 31 December 2010.
During the year ended 31 December 2011 Security deposits decreased to Rs. 297.2 millionfrom Rs. 308.6 million as at 31 December 2010.
The loan to the Company’s employees which were outstanding as at 31 December 2011was Rs. 44.8 million from Rs. 62.9 million as at 31 December 2010.
Provision for Income Tax has been computed on the basis of Minimum Alternate Tax (MAT)in accordance with Sec 115JB of the Income Tax Act,1961, the Company has recognized"MAT credit entitlement" of Rs. 1,613.6 million as at 31 December 2011 (2010 :Rs. 1,780.3 million). During the year ended 31 December 2011, the amount deposited withtax authorities increased to Rs. 345.9 million from Rs. 331.4 million as at 31 December2010.
During the year ended 31 December 2011 derivative assets decreased to Rs. 14.7 millionfrom Rs. 224.1 million as at 31 December 2010 relate to Mark to Market gain on foreignexchange contracts.
During the year ended 31 December 2011 the amount paid towards advance tax net ofprovision for tax has increased to Rs. 1,241.1 million from Rs. 398.2 million as at 31December 2010.
During the year ended 31 December 2011 amount of service tax receivable increased toRs. 144.5 million from Rs. 47.9 million as at 31 December 2010.
Current liabilities
Current liabilities primarily include creditors for goods and expenses of Rs. 661.3million, which represent amounts payable to vendors for goods or services rendered.Deferred revenue of Rs. 1,275.1 million denotes billings in excess of revenues recognized.Advances received from customers of Rs. 113.04 million include amounts received fromcustomers for the delivery of future services. Accrued exps 3,049.9 million includeemployee related provision and others. Unrealised loss on derivative financial instrumentsof Rs. 916.1 million relate to Marked to Market loss on foreign exchange contracts. Otherliabilities of Rs. 404.1 million include provisions for statutory liability.
Provisions
Provision for taxation represents estimated income tax liabilities, both in India andoverseas. Provision for taxation (net of advance tax) as of 31 December 2011 was Rs.1,262.6 million. As at 31 December 2011, provision for retirement benefits decreased toRs. 783.8 million from Rs. 1,227.7 million as at 31 December 2010.
Results of operations
The following table sets forth certain financial information for the year ended 31December 2011 as a percentage of revenues, calculated from the consolidated financialstatements:
| | (Rs. in thousands) |
| Amount | % of Income |
| Sales and Service Income | 35,679,408 | 95.7% |
| Other income | 1,600,030 | 4.3% |
| Total income | 37,279,438 | 100 % |
| Personnel cost | 21,816,897 | 58.5% |
| Selling, general and administration cost | 8,284,992 | 22.2% |
| Depreciation | 1,367,889 | 3.7% |
| Transfer from revaluation reserves | (81) | (0.0%) |
| Interest costs | 26,827 | 0.1% |
| Impairment losses | 891,844 | 2.4% |
| Total expenses | 32,388,368 | 86.9% |
| Profit before tax and before prior period items | 4,891,070 | 13.1% |
| Provision for taxation | 715,470 | 1.9% |
| Profit after tax and before prior period items | 4,175,600 | 11.2% |
| Prior period items | (161,029) | (0.4%) |
| Profit for the year | 4,014,571 | 10.8% |
Income
The Company’s sales and service income was Rs. 35,679.4 million in 2011 from Rs.31,880.8 million in 2010.
The Company derives a significant proportion of its revenues from clients located inthe United States. In 2011, the Company derived 77.5 per cent of its revenues, fromclients located in the United States. However, strong revenue growth was achieved in otherregions and the business achieved a greater element of geographical diversification.
Other income has reduced to Rs. 1,600.03 million in 2011 from Rs. 2,194.2 million in2010. During 2011, other income comprised interest of Rs. 62.7 million for reversal of IRSinterest and bank deposit interest, dividend income of Rs. 655.1 million for dividend oncurrent investments – non trade, gain of Rs. 345.3 million on the sale of non tradeinvestments, Rs. 383.6 million for foreign exchange gain and other miscellaneous income ofRs. 153.2 million comprises sundry creditors and advance from customer written back duringthe year.
Personnel costs
Personnel costs were Rs. 21,816.9 million and Rs. 18,898.1 million in 2011 and 2010,respectively. These costs represent 58.5 per cent and 55.5 per cent of the Company’stotal income in 2011 and 2010, respectively. Personnel costs comprise salaries paid toemployees in India and overseas staff expenses.
Selling, general and administration expenses
The Company incurred selling, general and administration expenses of Rs.8,284.9 millionand Rs. 6,875.9 million, representing a 22.2 per cent and 20.2 per cent of total income in2011 and 2010, respectively. Selling, general and administration expenses include costssuch as, subcontractor costs, travelling expenses, communication expenses, officeexpenses, legal and other professional fees, advertisement and publicity, and othermiscellaneous selling and administrative costs.
Depreciation and amortisation
The Company provided Rs. 1,367.9 million and Rs. 1,184.7 million towards depreciationfor 2011 and 2010, respectively. Depreciation as a percentage of gross block of fixedassets was 8.8 per cent and 8.3 per cent for 2011 and 2010, respectively.
During the year ended 31 December 2007, Patni has, through its wholly owned subsidiary,Patni USA, acquired from one of its major customer, the worldwide rights for a softwareProprietary Intellectual Property Rights ("IPR") that enables communicationservice providers to offer customer management, retail point-of-sale and billing servicesfor a variety of products and services The Group is using this intellectual property forthe purposes of software licensing, provision of reusable IP-led IT services, managedservices and provision of hosted or software-as-a-service solutions. As of and during theyear ended 31 December 2011, the Management assessed the carring amount and expected cashflow from this IPR and concluded that the carring amount of this IPR is not recoverable.Accordingly, the Company recorded an impairment charge of Rs. 401.0 million for this IPR.
In June 2010, Patni, through its wholly owned subsidiary, Patni UK, acquired from oneof its customer, an existing software Intellectual Property Rights ("IPR") whichis used for education sector management in UK and Ireland. The Company intends to increasethe revenue by sale of licenses in certain geographies along with significant use inhorizontals or verticals other than the learning domain. During the year, the Companyevaluated this IPR and concluded that it was impaired as a result of substantial declinein expected cash flow and change in business strategy for usage of IPR. Accordingly, inthe year ended 31 December 2011, the Company recorded an impairment charge of Rs. 490.8million.
The aggregate impairment charge of Rs. 891.8 million for the year ended 31 December2011.
Interest
The Company incurred interest costs of Rs. 26.8 million and Rs. 47.8 million in 2011and 2010, respectively. These costs mainly comprise interest on tax assessments andinterest on finance lease obligations relating to vehicles acquired by the Company.
Provision for taxation
The Company provided for its tax liability both in India and overseas. The details ofprovision for taxes are as follows:
| | (Rs. In thousands) |
| 2011 | 2010 |
| Provision for tax expense consists of the following: | | |
| Current taxes: | | |
| - Indian | 914,072 | 1,257,624 |
| - Foreign | (250,262) | 239,325 |
| - MAT credit entitlement | (222,482) | (709,288) |
| 441,328 | 787,661 |
| Deferred tax expense /(credit) | | |
| - Indian | 248,254 | 118,589 |
| - Foreign | 25,888 | (69,179) |
| 274,142 | 49,410 |
| 715,470 | 837,071 |
The Statute of limitation period for the March 2008 and March 2007 tax return of the USBranch of the Company expired in December 2011 and December 2010 respectively i.e. onexpiry of 3 years from the date of filing which was 15 December 2008 and 15 December 2007.Hence the Company has reversed the provision of Rs. 390.0 million.
The Company has recognised "MAT credit entitlement" of Rs. 222.5 million forthe year ended December 2011 (2010: Rs. 709.3 million) by crediting to the Profit and LossAccount.
Presently, we benefit from the tax holidays given by the Government of India for theexport of IT services from specially designated software technology parks("STPs") and special economic zones ("SEZs") in India. As a result ofthese incentives, which include a 10 year tax holiday from Indian corporate income taxesfor the operation of most of our Indian facilities, our operations have been subject torelatively low tax liabilities. The tax benefits available for all our STP facilitiesexpired on 31 March 2011. Consequently, our effective Indian tax rate has increasedsignificantly.
Development centers operating in SEZs are entitled to certain income tax incentives of100% of the export profits for a period of five years, 50% of such profits for the nextfive years and 50% of the profits for a further period of five years subject tosatisfaction of certain capital investments requirements. Our profitability would beadversely affected if we are not able to continue to benefit from these tax incentives.Further, provisions of the Indian Income Tax Act 1961 are amended on an annual basis byenactment of the Finance Act. In addition, we may also be subject to changes in taxationresulting from the actions of applicable income tax authorities in India or from Indiantax laws that may be enacted in the future. For example, we may incur increased taxliability as a result of a determination by applicable income tax authorities that thetransfer price applied to transactions involving our subsidiaries and the Company was notappropriate.
Increases in our effective tax rate due to expired tax benefits, changes in applicabletax laws or the actions of applicable income tax or other regulatory authorities couldmaterially reduce our profitability.
The Company recorded net deferred tax expenses of Rs. 274.1 million and Rs. 49.4million for 2011 and 2010, respectively.
Net Profit after tax and after prior period items
Net profit was Rs. 4,014.6 million and Rs. 6,231.7 million in 2011 and 2010,respectively. Net profit as a percentage of total income was 10.8% and 18.3% in 2011 and2010, respectively. The decline in net profit mainly on account of increase in personnelcost was by 15.4%; selling, general and administration expenses by 20.5%; impairmentlosses and depreciation by 90.7% (impairment in 2011 Rs. 891.8 million and in 2010 Nil)and reduction in other income by 27.1%, which is offset by higher sales and service incomeof 11.9% as compared to 2010.
Development in Human Resources
We employed around 18,000, 17,600 and 14,000 employees as of 31 December 2011, 2010 and2009, respectively. Out of 18,000 employees, around 17,000 were software professionals asof 31 December 2011. Of these software professionals, around 3,000 employees werecategorized as onsite and 14,000 as offshore.
We believe that our ability to maintain and continue our growth depends to a largeextent on our strength in attracting, training, motivating and retaining our employees. Weoperate in eight major cities in India, which enables us to recruit technologyprofessionals from different parts of the country. The key elements of our human resourcemanagement strategy include recruitment, training and development, compensation andretention.